Wednesday, April 6, 2011

Dell's Strategic Outsourcing


Dell Computers' dominance and success in the PC market was quite well-known to us. But when it entered the server market some years ago, the top management had debated heavily on whether to outsource the field services to an outside provider, and if outsource, to whom. Specifically, they were wondering 1) how they could make sure their operating strategy would not be affected; 2) how to maintain market share and brand image; and 3) how to provide field service adequately to large-server clients, which was not Dell's core capability.

Let's start with "why" first. Dell was doing pretty good in PC market at the time, having its customer service considered as top-notch in the market. It had cost leadership, since it introduced a new model into the market - it did not manufacture the parts, but simply configured the order according to customer's demand. But server market was different. Clients composition changed from individuals to large corporations, who demanded much faster troubleshooting services ("four hour service level"), and more importantly, on-site service. This brought a huge challenge to Dell, who was famous for its lean production and inventory management. If it wanted to have on-call technicians or the parts ready, their promising operating principles had to change, and that would seriously threaten profitability.

Dell had two options - expanding in-house capability or outsource. And if they chose outsourcing, they could either outsource to IBM, who was expert in this area, or some small companies specialized in IT customer services. Both had pros and cons: while IBM choice could guarantee customer satisfaction and brand control, IBM was their fierce competitor in PC market. Loss of market share might be resulted from corporate clients switching to IBM (seeing that it did a good job to the fixing the server). Small companies did not have this problem, but clients who had traditionally relied heavily on Dell's reputation might doubt whether Dell could still do a good job in the server market.

To fast-forward the story, Dell ultimately chose IBM to outsource its field service, considering the merit of its wide network of consultants, experts and technicians. But Dell didn't stop there. Subsequently, it acquired small companies to expand its IT capabilities.

While the Strategic Sourcing article stated clear steps on making a decision on capability sourcing of a company, I think it failed to highlight the importance of selecting the right partner. Specifically, I would like to ask the following questions:
  • How do companies ensure that the outsourcing partner they choose will not become a direct competitor in the future?
  • How do companies deal with the challenge of losing important supplier-customer relationship, as in the case of Dell?

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